Charitable giving

Charitable Giving

Charitable trusts and planned giving allow you to contribute to nonprofit organizations rather than writing a blank check to Uncle Sam.

Social Capital: Voluntary and Involuntary Philanthropy

To some extent, the law allows you to give money to charity instead of paying takes.

Thus, every dollar you make can be divided into two parts: the part you can keep, and the part you can't keep. You might call the part you keep personal capital and the part you can't keep social capital:

Social capital

You can control what happens to your personal capital by applying it toward your own financial ends: your home, your family, your investments and retirement plan. You can also control what happens to your social capital by doing charitable planning, i.e., making charitable contributions or “planned giving,” often in the form of a charitable trust.

If you choose not to do estate or tax planning, you become an involuntary philanthropist, since your dollars go to the IRS and are funneled over to Congress and spent in accordance with the current U.S. Budget. If on the other hand you benefit your chosen charities or private foundations, you become a voluntary philanthropist and gain the satisfaction of knowing where your social capital will be spent.

Types of Charitable Entity

The Tax Reform Act of 1969 defined the main types of charitable organization.

Public charities are supported by contributions from the general public, rather than from one or two families, and have goals of a general philanthropic nature (e.g., charitable, educational, or religious). Gifts to these 501(c)(3) organizations are eligible for deduction.

A supporting organization either makes grants to, or performs the operations of, a public charity similar to a private foundation. Because it acts in the pubklic good by supporting a public charity, it gains the same exemption status as the charity it supports. The Pension Protection Act of 2006 set forth some additional regulation of supporting organizations in response to some perceived abuses of this type of org. However, unlike donations to a private foundation, donations to a supporting organization allow less control over the organization to the founders than private foundations.

A private foundation is a charity that is neither a public charity nor a supporting organization. An example would be the Bill & Melinda Gates Foundation. Because it is private, donors have more control over their donations, hence its deductibility rate is less than a public charity.

Noah's ark for charitable orgs

Like much federal legislation, the Tax Reform Act of 1969 was grand in scope and placed heavy burdens on the most prestigious exemption status. If you view the Act as the "flood" that changed the legal “landscape,” you can come up with various furry and fuzzy creatures to describe the charitable orgs that live in that legal realm. Some entities retain characteristics of their provenance as well as their new homes, i.e. “furry fish,” and these picturesque descriptions can be edifying.

Click here or on the image to enlarge / print.

Charitable Trusts

Charitable gifts are often included in Revocable Living Trust-centered plans, but in some cases it is preferable to formalize the charitable planning component in a separate Charitable Trust, either a unitrust or an annuity trust. In a unitrust, the principal is placed in the trust and is accumulated at typically 6-7% [the5280 rate, which is set by the Federal Reserve Bank]. Interest is paid at intervals to the charity for a certain term, after which the principal reverts to the donor. This is shown in the diagram below:

Such trusts provide vehicles for reducing tax load while insuring steady income and an ultimate gift to charity.

A unitrust payout percentage must comply with three basic rules. The trust must pay a minimum of 5%, a maximum of 50% and a percent that produces a charitable deduction of 10% or greater. The 5% minimum and 50% maximum requirements are easy to understand. The 10% Minimum Deduction Interest (MDI) is understood if one reviews the basics of the charitable deduction.

Trusts that pass a 10% deductibility test qualify as charitable entities.

There are two main types of Charitable Trusts: Charitable Remainder Trusts (CRTs) and Charitable Living Trusts (CLTs). In both types, assets are transferred to the Trust as principal. In the CRT, interest on the principal is distributed periodically to the donor as income, with the principal ultimately passing to charity. In the CLT, interest on the principal is distributed periodically to the charity, with the principal ultimately passing ultimately to the donor (or their heirs). In both cases, a substantial tax benefit provides financial incentive in addition to the obvious charitable one. [Read more…]

Management of a CRT requires some annual "maintenance" administrative tasks that can be performed by the donor or, for a fee, by a third-party service such as Renaissance.

Create Your Own Charity

For some clients there is no charitable organization supporting an activity they want to support, so we create one for them.

For example, my wife needed to create a nonprofit org to fill a need to organize and educate her profession, landscape design. She and her colleagues defined their goals and held a planning meeting and then hired us to set up a Delaware nonprofit 501(c)(3) org to do that. Today. the APLD (Association of Professional Landscape Designers) is a service organization whose goal is to educate its members on the practice of landscape design and to provide a certification process to standardize the level of care across its membershipo. The APLD is not a trade organization like the American Bar Association, for example, and as a 501(c)(3) org it cannot have lobbying as a primary goad, although it can "educate" lawmakers on areas of the law pertinent to their vocation.

As another example, several of my fellow Bach fans and I formed the Global Bach Community (GBC), a nonprofit org which, among other things, acts as an "umbrella organization," extending its IRS exemption "umbrella" to cover its member organizations. This means that organizations that join the GBC need not file for tax-exempt status individually with the IRS, but can claim tax-exempt 501(c)(3) status simply by joining the GBC.